Elon Musk’s tunnel-digging venture, the Boring Co., is being pulled into the billionaire entrepreneur’s controversial practice of spreading overlapping assets across his disparate technology firms.
On Tuesday, the Tesla Inc. TSLA -4.73% chief is set to unveil a test tunnel developed by the Boring Co., the first of what Mr. Musk imagines as a futuristic series of high-speed underground highways to alleviate traffic.
The entrance of the two-mile-long Boring test tunnel is being constructed in Hawthorne, Calif., at the headquarters of another Musk-controlled company, Space Exploration Technologies Corp., partly by SpaceX employees using equipment purchased with SpaceX funds, people familiar with the matter said.
The arrangement alarmed some longtime investors in SpaceX, including its largest outside backer, Peter Thiel’s Founders Fund, some of the people said. The investors learned in recent months that despite the diversion of SpaceX resources and staffing to the fledgling Boring startup, it was Mr. Musk who was in line to receive almost all of any future profits, these people said.
The investors questioned SpaceX about why their investment dollars into a company ostensibly devoted to launching satellites and carrying humans to Mars were instead partly used to start a separate company that principally benefited Mr. Musk. When the Boring Co. was earlier this year spun into its own firm, more than 90% of the equity went to Mr. Musk and the rest to early employees, the company has said.
In internal meetings this year, Founders Fund partners debated what to do about the diversion of SpaceX resources. Their concerns reached a SpaceX board member and other company officials, the people familiar with the matter said.
The SpaceX board never voted on devoting resources to Mr. Musk’s new venture.
at all four companies
Musk holds nearly all equity in Boring
Loaned staff, property and funds for a 6% stake
The Boring Co. has since given some equity to SpaceX as compensation for the help, a move that hasn’t been previously reported or publicly disclosed. SpaceX hasn’t formally notified its investors of the exchange. Some investors say they aren’t aware of it.
SpaceX received about 6% of Boring stock, “based on the value of land, time and other resources contributed since creation of the company,” said a SpaceX spokesman. He declined to comment further on the circumstances surrounding the transaction.
Mr. Musk declined to comment through the SpaceX spokesman.
Founders Fund in a statement said it has been briefed on the relationship between SpaceX and the Boring Co. “and we have no concerns whatsoever.”
The Boring Co.’s unusual inception is illustrative of how Mr. Musk defies the conventions of traditional corporate chieftains and sometimes supports his business empire by shuffling finances between companies.
Early in Tesla’s history, he personally borrowed $20 million from SpaceX to help fund the electric-car company. He is the chief executive and largest shareholder of both companies. In 2015 and 2016, according to regulatory filings, SpaceX purchased more than $250 million worth of bonds from SolarCity, the solar-panel installation firm where Mr. Musk was chairman and its largest shareholder. Later in 2016, Tesla acquired SolarCity after other bidders passed.
“There were a few cases where one company was doing considerably better than another, and I borrowed money,” he said in a 2016 interview with The Wall Street Journal.
In April, a Boring Co. regulatory filing disclosed the company had raised $112.5 million in financing and lists as an executive and director Jared Birchall, who is also the president of another Mr. Musk-led company, Neuralink, which is developing brain computers. A Tesla proxy filing this year revealed it has sold about $400,000 in parts to the Boring Co.
The idea for the Boring Co. traces back to two years ago when Mr. Musk, in what he has since described as a joke, wrote in a series of tweets: “Traffic is driving me nuts. Am going to build a tunnel boring machine and just start digging....”
He last year revealed a Boring Co. concept video showing elevators built into a street that would lower cars into a tunnel, where they would travel on high-speed “skates” at up to 130 miles an hour. A subsequent video from May showed pedestrians walking onto a futuristic bus that is lowered underground to the tunnel network.
Some SpaceX employees began working on the project and last year acquired a secondhand giant tunneling machine to help construct the first phase of what Mr. Musk predicted could be a series of underground tubes connecting cities like Washington, D.C., and New York.
Local regulators who visited the construction site had trouble determining who was leading the project. In an August 2017 visit, representatives of the California Division of Occupational Safety and Health were told by the site safety manager—himself a SpaceX employee—he was “unsure whether TBC is a separate company or just a [unit] of SpaceX,” according to documents reviewed by the Journal after a public record request.
A week later, the same safety manager advised the regulators that some SpaceX employees “are involved in the project but aren’t actually employees of TBC,” the documents show. An agency spokesman declined to comment further.
San Francisco-based Founders Fund and some other investors have collectively poured roughly $2 billion into SpaceX, valued at around $28 billion in a private investment round this year.
Founders Fund and its co-head, Mr. Thiel, are among Mr. Musk’s most important boosters. Mr. Thiel and Mr. Musk earlier worked together on developing digital payments company PayPal Holdings Inc.
Mr. Thiel has recently told associates he remains a believer in Mr. Musk. In October, Mr. Thiel attended a Halloween party hosted by Mr. Musk.
In a joking nod at his well-publicized interest in blood transfusion therapies to combat aging, Mr. Thiel dressed up as a vampire.
—Eliot Brown and Rolfe Winkler contributed to this article.
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